IMF says Malawi economy in ‘lean season’: To consider unlocking credit facility in 2015

As the economic woes continues biting Malawians, the International Monetary Fund (IMF) which froze its Extended Credit Facility (ECF) to Malawi due to cashgate scandal says it will consider to submit the country’s request to complete the fifth and sixth reviews under the ECF-supported program during its board meeting early 2015, dashing hopes of possible donor-fund return to Malawi anytime soon.

The IMF said this on Tuesday after the completion of a two-week visit in Malawi by its team of experts which was led by IMF’s Oral Williams, which was aimed to conduct discussions for ECF arrangement.

The mission held discussions with Finance Minister Goodall Gondwe, Reserve Bank of Malawi (RBM) Governor Charles Chuka, Secretary to the Treasury Ronald Mangani, other senior government and RBM officials, a broad range of national stakeholders outside government, as well as representatives of Malawi’s development partners.

In a statement issued at the end of the mission Williams said preliminary indications are that economic activity has demonstrated considerable resilience with real Gross Domestic Product (GDP) growth for 2014 is projected between 5 and 6 percent, with contributions from the agriculture and retail trade sectors.

He however says inflation remains high, in part because of uncertainties about the resumption of budget support.

“Policy implementation continues to take place under difficult circumstances. Shortfalls in budget support due to the cashgate scandal have led to challenges in the execution of the previous and current year’s budget, with increased recourse to costly domestic financing and the accumulation of significant domestic debt.

“At the same time, the exchange rate has weakened considerably, exacerbating inflationary pressures. The depreciation is in part seasonal, as the economy has entered the ‘lean season’ where export-related foreign exchange receipts are low. However, this has been compounded by ongoing shortfalls in budget support.”

According to Williams the discussions focused on the policies necessary to return the economy to a strong, noninflationary, and inclusive-growth trajectory.

“Significant agreement has been reached in a number of important areas. These include on fiscal policy, where the authorities intend to follow a restrained stance, and on monetary policy, which will remain tight until inflation returns to a clear, declining trend,” he says.

The mission has emphasized on the need for Malawi government to exercise greater control over spending commitments in line with available financing to avoid the accumulation of additional debt.

It also has noted that containing spending within approved ceilings would allow fiscal policy to be supportive of monetary policy and mitigate the impact of inflation on the most vulnerable segments of the population.

The mission noted, however, that despite a favourable outlook for international food and fuel products, the policy actions required to bring inflation to single digits would likely entail some slowing of economic growth in 2015.

“The Malawi authorities reiterate their commitment to strengthen public financial management systems and to be guided by the gaps identified in the recently released forensic audit report,” reads the statement.

The mission views implementation of meaningful reform in this area to be crucial in supporting the macroeconomic policy stance and boosting private sector confidence.

“This will in turn help catalyze investment required for strong growth over the medium term.”

Discussions with donors emphasized that vigorous implementation of reforms in this area would be a precondition for a resumption of budget support.

“The mission will continue to work with the authorities in addressing these challenges in the weeks ahead. Assuming a successful resolution of remaining issues, it is anticipated that a request to complete the Fifth and Sixth reviews under the ECF-supported program could be submitted for consideration by the IMF’s Executive Board in early 2015.”